The Year's Biggest Ideas in Economics

by Zubin Jelveh | December 30, 2009

Continuing a tradition of mine, here is a shamelessly subjective list of the most noteworthy research which came out in the last year:

Putting a new spin on the idea of sticky wages, Lena Edlund, Joseph Engelberg, and Christopher A. Parsons point out that the earnings of high-end prostitutes don't fall as fast as the decline in the sex-worker's physical attractiveness.

William Nordhaus makes a mathematical argument for why it's impossible to ever accurately measure happiness.

Before there was Superfreakonomics, before there was even Freakonomics, there was Steve Levitt and John Donohue's (in)famous abortion paper claiming that a major cause of declining crime rates was the legalization of abortion. Reviewing follow-up research 10 years after Levitt and Donohue's original paper, Theodore Joyce finds little support for the abortion-crime link.

Yale's (and AIG's) Gary Gorton released a much-discussed paper on the nature of banking panics.

The always-interesting David Galenson surveyed art-history textbooks concluded that Alfred Stieglitz was considered by scholars to be the greatest photographer of the 20th century.

A pair of papers (one by Lawrence Christiano, Martin Eichenbaum, and Sergio Rebelo and another by Gauti Eggertsson) provided strong evidence that fiscal policy can be particularly effective when interest rates are close to, or below, zero.

And Eric Leeper says that advancements in monetary policy that fall out of the theory of rational expectations can also be applied to fiscal policy.

With a whole of host of behavioral economists in the Obama administration, Bruce Ian Carlin, Simon Gervais, and Gustavo Manso have a timely paper on the limits of nudge-ocracy.

Another set of papers sheds further light on the gender gap in achievement in the hard sciences. Roland Fryer and Levitt show that "girls do not lag boys in math in countries with same-sex schooling." Scott Carrell, Marianne Page, and James West show that a professor's gender has a "powerful effect" on the achievement of women.

Annamaria Lusardi (and various coauthors) wrote three different -- and mostly depressing -- papers detailing the sorry state of financial literacy. In the first, she finds that "only about one-third of the population seems to comprehend interest compounding or the workings of credit cards." And in the next, she notes that retirees "lack even a rudimentary understanding of stock and bond prices, risk diversification, portfolio choice, and investment fees." But there is reason for some hope since, as Lusardi writes in the third paper: "[T]hose with more advanced financial knowledge are those more likely to be retirement-ready."

But financial know-how is no panacea in general. This theoretical work by Sanjeev Arora, Boaz Barak, Markus Brunnermeier, and Rong Ge claims that it's possible to construct a financial derivative with an undetectable booby trap.

Tobias Adrian and former Bernanke colleague Hyung Song Shin argue for an expanded version of monetarism in which the Fed takes into account the total size of financial sector balance sheets when setting interest rates.

Charles Calomiris, Stanley D. Longhofer, and William Miles say there is no such thing as a housing wealth effect.

And finally, with distrust of the market system at understandably elevated levels right now, it's worth pointing out that, as Hayek argued, the development of markets was likely essential in producing critical parts of our system of morality. Along these lines, Patrick Francois, Thomas Fujiwara, and Tanguy van Ypersele show that U.S. states which were quicker in deregulating their banking systems -- and presumably increasing competition -- also experienced greater levels of trust.

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